A home equity mortgage can be a great temptation especially when you are not doing well financially. It is easily available since you collateralize your property against this loan. The rate of interest is considerably lesser than interest on loans that are not backed by an asset, such as personal loans and credit card debt. Another important advantage of such a mortgage is that you can avail tax deduction on the interest that you pay. It allows you to borrow up to 80% of your equity in your house. Equity is calculated by deducting all outstanding debts from the present value of your property. In an equity loan, you can borrow the amount as one time lump sum payment or as a line of credit.

Risk of Losing Your Home

Despite its advantages, a home equity mortgage can pose a serious risk since you have to collateralize your home. If you miss your payments you can even lose the ownership of your home through foreclosure. The lender can sell your property to compensate for his loss.

Avoid Reckless Spending

Home equity mortgage allows you to draw cash so that you can address urgent financial needs. You can use this for renovating your home, paying fees for your children’s college education or even for investment. But reckless spending can cause serious problems when your home is at risk. You should be extremely cautious about how you spend the cash that you get from this mortgage.

Don’t Have Blind Faith in the Housing Market

You may believe that the value of your property will continue to rise which will result in rise in your equity value. However, it is not wise to place too much trust in the housing market. The value of a house can easily decline as well and you can find yourself in serious trouble when that happens. You may even go ‘upside down’ on the value of your collateral. This means that you may end up owing more than what your home is worth. A severe fall in the value of your home can bring a lot of financial stress and it can even lead to bankruptcy.

Analyse Your Financial Prospects

Before you secure a mortgage on your equity in your home, you should consider whether you can meet the additional monthly expenses comfortably. Do not push yourself too much. If you are not quite sure of your future financial prospects, you should decide against this loan.

Increase the Value of Your Property

You can renovate your home to increase the value of your property. But you should do it wisely. You should know what features will increase its value and what will not. If you add a swimming pool to your house, it may increase the price significantly, but if you renovate a small room or make minor extensions, the price may not move much.

Home equity mortgage can be extremely beneficial if you are certain that you can you’re your monthly repayments comfortably. But if you have any doubts about your financial situation, you should stay away from it.

Author Bio: For more information on home equity loans or Canadian Mortgages, contact Canadian Mortgages Inc.

Category: Finances
Keywords: mortgages